Finance Receivables

Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases, notes receivable, and deferred acquisition fees. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated financial statements.

Net Investments in Direct Financing Leases

Net investments in direct financing leases is summarized as follows (in thousands):



	December 31,
	2016			2015
Minimum lease payments receivable	$	619,014		$	797,736
Unguaranteed residual value	639,002			700,143
	1,258,016			1,497,879
Less: unearned income	(573,957		)	(741,526		)
	$	684,059		$	756,353

2016 — Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $71.2 million for the year ended December 31, 2016. During the year ended December 31, 2016, the U.S. dollar strengthened against both the euro and British pound sterling, resulting in a $18.3 million decrease in the carrying value of Net investments in direct financing leases from December 31, 2015 to December 31, 2016. During the year ended December 31, 2016, we reclassified 31 properties with a carrying value of $9.7 million from Net investments in direct financing leases to Real estate, at cost, in connection with the extensions of the underlying leases. During the year ended December 31, 2016, we reclassified a property from Net investments in direct financing leases to Assets held for sale based on the fair value of the property less costs to sell of $26.2 million (Note 5) and recognized an impairment charge of $7.0 million on the property (Note 9).

2015 — Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $74.4 million for the year ended December 31, 2015. We also recognized impairment charges totaling $3.3 million on five properties accounted for as Net investments in direct financing leases in connection with an other-than-temporary decline in the estimated fair values of the properties’ residual values (Note 9).

2014 — Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $78.8 million for the year ended December 31, 2014. In connection with the CPA^®:16 Merger in January 2014, we acquired 98 properties subject to direct financing leases with a total fair value of $538.2 million (Note 3), of which one was sold during the year ended December 31, 2014 (Note 17). In connection with our acquisition of an investment in Australia, we acquired one property subject to a direct financing lease for $3.3 million. During the year ended December 31, 2014, we reclassified properties with a carrying value of $13.7 million from Net investments in direct financing leases to Real estate in connection with the extensions of the underlying leases. We also recognized impairment charges totaling $1.3 million on eight properties accounted for as Net investments in direct financing leases in connection with an other-than-temporary decline in the estimated fair values of the properties’ residual values (Note 9).

Scheduled Future Minimum Rents

Scheduled future minimum rents, exclusive of renewals, expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments, under non-cancelable direct financing leases at December 31, 2016 are as follows (in thousands):



Years Ending December 31,	Total
2017	$	65,781
2018	65,893
2019	64,138
2020	63,438
2021	60,232
Thereafter	299,532
Total	$	619,014

Notes Receivable

Earnings from our notes receivable are included in Lease termination income and other in the consolidated financial statements.

At December 31, 2016 and 2015, we had a note receivable with an outstanding balance of $10.4 million and $10.7 million, respectively, representing the expected future payments under a sales type lease, which was included in Other assets, net in the consolidated financial statements.

At December 31, 2014, we had a B-note with an outstanding balance of $10.0 million. In February 2015, the B-note was repaid in full to us for $10.0 million.

Deferred Acquisition Fees Receivable

As described in Note 4, we earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA^® REITs. A portion of this revenue is due in equal annual installments over three years, provided the CPA^® REITs meet their respective performance criteria. Unpaid deferred installments, including accrued interest, from the CPA^® REITs were included in Due from affiliates in the consolidated financial statements.

Credit Quality of Finance Receivables

We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. As of December 31, 2016 and 2015, we had allowances for credit losses of $13.3 million and $8.7 million, respectively, on a single direct financing lease, including the impact of foreign currency translation. During the years ended December 31, 2016 and 2015, we increased the allowance by $7.1 million and $8.7 million, respectively, which was recorded in Property expenses, excluding reimbursable tenant costs in the consolidated financial statements, due to a decline in the estimated amount of future payments we will receive from the tenant, including the possible early termination of the direct financing lease. At both December 31, 2016 and 2015, none of the balances of our finance receivables were past due. Other than the lease extensions noted under Net Investment in Direct Financing Leases above and the allowance for credit losses discussed above, there were no modifications of finance receivables during the years ended December 31, 2016 or 2015. We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables was last updated in the fourth quarter of 2016. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as the CPA^® REITs are expected to have the available cash to make such payments.

A summary of our finance receivables by internal credit quality rating, excluding our deferred acquisition fees receivable, is as follows (dollars in thousands):



	Number of Tenants / Obligors at December 31,		Carrying Value at December 31,
Internal Credit Quality Indicator	2016	2015	2016		2015
1 - 3	27	28	$	621,955	$	657,034
4	5	6	70,811		110,002
5	1	—	1,644		—
			$	694,410	$	767,036